I examine the effects of market concentration on connectivity in network
industries. Using Cournot interactions for a duopoly, each network
chooses quantity, quality for communications within the provider's own
network (internal quality), and quality for communications between the
provider's network and other networks (external quality). I find that
large networks choose higher internal quality than do small networks and
large networks choose higher internal quality than external quality. I
also find that providers prefer flexible technologies that allow them to
simultaneously choose outputs and qualities. Small networks prefer
higher external quality than internal quality except when they make
credible quality commitments before choosing output and have higher
marginal operating costs than large networks. Networks choose identical
external quality unless they have exogenously determined customer bases.

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